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A Manifesto for Economic Sense

More than four years after the financial crisis began, the world's major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. And the reason is simple: we are relying on the same ideas that governed policy in the 1930s. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature, and the appropriate response.

These errors have taken deep root in public consciousness and provide the public support for the excessive austerity of current fiscal policies in many countries. So the time is ripe for a Manifesto in which mainstream economists offer the public a more evidence-based analysis of our problems.

  • The causes. Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions - other than Greece - this is false. Instead, the conditions for crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The collapse of this bubble led to massive falls in output and thus in tax revenue. So the large government deficits we see today are a consequence of the crisis, not its cause.
  • The nature of the crisis. When real estate bubbles on both sides of the Atlantic burst, many parts of the private sector slashed spending in an attempt to pay down past debts. This was a rational response on the part of individuals, but - just like the similar response of debtors in the 1930s - it has proved collectively self-defeating, because one person's spending is another person's income. The result of the spending collapse has been an economic depression that has worsened the public debt.
  • The appropriate response. At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending. At the very least we should not be making things worse by big cuts in government spending or big increases in tax rates on ordinary people. Unfortunately, that's exactly what many governments are now doing.
  • The big mistake. After responding well in the first, acute phase of the economic crisis, conventional policy wisdom took a wrong turn - focusing on government deficits, which are mainly the result of a crisis-induced plunge in revenue, and arguing that the public sector should attempt to reduce its debts in tandem with the private sector. As a result, instead of playing a stabilizing role, fiscal policy has ended up reinforcing and exacerbating the dampening effects of private-sector spending cuts.

In the face of a less severe shock, monetary policy could take up the slack. But with interest rates close to zero, monetary policy - while it should do all it can - cannot do the whole job. There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult.

How do those who support present policies answer the argument we have just made? They use two quite different arguments in support of their case.

The confidence argument. Their first argument is that government deficits will raise interest rates and thus prevent recovery. By contrast, they argue, austerity will increase confidence and thus encourage recovery.

But there is no evidence at all in favour of this argument. First, despite exceptionally high deficits, interest rates today are unprecedentedly low in all major countries where there is a normally functioning central bank. This is true even in Japan where the government debt now exceeds 200% of annual GDP; and past downgrades by the rating agencies here have had no effect on Japanese interest rates. Interest rates are only high in some Euro countries, because the ECB is not allowed to act as lender of last resort to the government. Elsewhere the central bank can always, if needed, fund the deficit, leaving the bond market unaffected.

Moreover past experience includes no relevant case where budget cuts have actually generated increased economic activity. The IMF has studied 173 cases of budget cuts in individual countries and found that the consistent result is economic contraction. In the handful of cases in which fiscal consolidation was followed by growth, the main channels were a currency depreciation against a strong world market, not a current possibility. The lesson of the IMF's study is clear - budget cuts retard recovery. And that is what is happening now - the countries with the biggest budget cuts have experienced the biggest falls in output.

For the truth is, as we can now see, that budget cuts do not inspire business confidence. Companies will only invest when they can foresee enough customers with enough income to spend. Austerity discourages investment.

So there is massive evidence against the confidence argument; all the alleged evidence in favor of the doctrine has evaporated on closer examination.

The structural argument. A second argument against expanding demand is that output is in fact constrained on the supply side - by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations. But in most countries that is just not the case. Every major sector of our economies is struggling, and every occupation has higher unemployment than usual. So the problem must be a general lack of spending and demand.

In the 1930s the same structural argument was used against proactive spending policies in the U.S. But as spending rose between 1940 and 1942, output rose by 20%. So the problem in the 1930s, as now, was a shortage of demand not of supply.

As a result of their mistaken ideas, many Western policy-makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s, and for the following forty years or so the West enjoyed an unparalleled period of economic stability and low unemployment. It is tragic that in recent years the old ideas have again taken root. But we can no longer accept a situation where mistaken fears of higher interest rates weigh more highly with policy-makers than the horrors of mass unemployment.

Better policies will differ between countries and need detailed debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this Manifesto to register their agreement at, and to publically argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong.

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Signed By

Aaron Goldzimer - Stanford Graduate School of Business / Yale Law School
Alan Manning - London School of Economics
Alan Maynard - University of York
Alan S. Blinder - Princeton University
Alasdair Smith - University of Sussex
Alfonso Lasso de la Vega - Former Deputy Director in UNCTAD
Ali Rattansi - Professor, City University, London
Andrew Graham - Oxford University
Barbara Petrongolo - Queen Mary University and CEP (LSE)
Barbara Wolfe - University of Wisconsin-Madison
Barry Bluestone - Northeastern University
Barry Supple - University of Cambridge
Charles Wyplosz - The Graduate Institute, Geneva
Chris Pissarides - London School of Economics and Political Science
Christian Kroll - University of Bremen / Jacobs University
Christopher Allsopp - Director, Oxford Insitute for Energy Studies, Oxford
Colin Thain - University of Birmingham, UK
David Blanchflower - Dartmouth College
David Hemenway, economist - Harvard School of Public Health
David Sapsford - Edward Gonner Professor of Applied Economics (Emeritus), University of Liverpool
David Soskice - University of Oxford
David Vines - Oxford University
Demetrios Papathanasiou - The World Bank
Donald R. Davis - Columbia University, Dept. of Economics
Eric van Wincoop - University of Virginia
Erzo F.P. Luttmer - Dartmouth College
G C Harcourt - University of New South Wales, School of Economics
Gary Mongiovi - St Johns University, New York
Geoffrey M. Hodgson - Professor, University of Hertfordshire, UK
Geraint Johnes - Lancaster University
Gianni Zanini - World Bank (Consultant; former Lead Economist)
Hannes Schwandt - CEP/LSE and Universitat Pompeu Fabra
Heinz Kurz - University of Graz, Austria
J. Bradford DeLong - U.C. Berkeley
Jan-Emmanuel De Neve - University College London & LSE Centre for Economic Performance
Jeffrey Frankel - Harvard University
Jeremy Hardie - LSE Centre for Philosophy of Natural and Social Science
Joan Costa Font - London Sschool of Economics
Jocelyn Boussard - European Commission
John H Bishop - Cornell University
John Van Reenen - Centre for Economic Performance, LSE
Jonathan Portes - National Institute of Economic and Social Research
Joseph Gagnon - Peterson Institute for International Economics
Justin Wolfers - Princeton University
Kalim Siddiqui - Business School, University of Huddersfield, UK
Ken Coutts - Faculty of Economics, University of Cambridge
Kevin ORourke - University of Oxford
Larry L Duetsch - Emeritus Prof of Econ, U of Wisconsin - Parkside
Lesley Potters - European Commission
Marcus Miller - Warwick University
Mariana Mazzucato - University of Sussex
Mark Setterfield - Trinity College, Connecticut
Mark Stewart - Warwick University
Max Steuer - London School of Economics
Michael Ambrosi - Professor Emeritus, University of Trier
Michael Graff - ETH Zurich and Jacobs University Bremen
Michael Waterson - University of Warwick
Nathan Cutler - Harvard Kennedy School
Nattavudh Powdthavee - University of Melbourne and Centre for Economic Performance, London School of Economics and Political Sciences
Nicholas Rau - University College London
Olaf Storbeck - Handelsblatt - Germanys Business and Financial Daily
Oriana Bandiera - London School of Economics
P.E. - Emeritus Professor of Economics,University of Reading
Patricia Rice - University of Oxford
Paul Anand - Open University/ HERC Oxford University
Paul Gregg - Professor, Dept of Social and Policy Sciences, University of Bath
Paul Krugman - Princeton University
Peter E. Earl - University of Queensland
Peter Elias - University of Warwick
Peter J. Hammond - University of Warwick
Peter Taylor-Gooby - University of Kent
Peter Temin - MIT
Philip Arestis - University of Cambridge
Philippe Martin - sciences po (paris)
Professor Paul Whiteley - University of Essex
Professor Sir Richard Jolly - Institute of Development Studies
Raffaella Sadun - Harvard Business School
Raja Junankar - University of New South Wales, University of Western Sydney, and IZA
Raquel Fernandez - NYU
Richard J. Smith - Faculty of Economics University of Cambridge
Richard Jackman - London School of Economics
Richard Layard - LSE Centre for Economic Performance
Richard Murray - former chief economist, Swedish Agency for Public Management
Richard Parker - Harvard University
Rick van der Ploeg - University of Oxford
Robert A. Feldman - IMF and Adjunct Professor Georgetown U. (retired)
Robert H. Frank - Cornell University
Robert Haveman - University of Wisconsin-Madison
Robert Neild - Emeritus Professor,Trinity College, Cambridge
Robert Pollack - Boston University
Robert Skidelsky - Wawick University
Roger Middleton - University of Bristol
Roger Stephen Crisp - St Annes College, Oxford
Ronald Schettkat - Schumpeter School, University of Wuppertal
Sergio Rossi - Department of Economics, University of Fribourg, Switzerland
Shaun P. Hargreaves Heap - University of East Anglia
Sheila Dow - University of Stirling (emeritus position)
Simon Wren-Lewis - Oxford University
Stefan Szymanski - University of Michigan
Stephen E. Spear - Carnegie Mellon University
Stephen Gibbons - London School of Economics
Susan Himmelweit - The Open University, UK
Terry Barker - University of Cambridge
Tony Venables - University of Oxford
Victor Halberstadt - Leiden University
Wendy Carlin - UCL
William Brown - University of Cambridge
William T. Dickens - Northeastern University and The Brookings Institution


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Recent Comments

  • Disincentivise competitions in all industries related to: Education Health Care Defence/policing Transport on rail Issue of credit All of above directly controlled by government Incentive to private enterprise with string attached: More employment More power to unions Renewable energy Total transparency on governments Re-writing of intercontinental defence cooperations (eg. NATO)
    Lorenzo Amisano
  • It is more than clear that the policies of austerity are destroying lives. Its time for the public sector to do its duty by the people and invest for the betterment of all.
    Prapanna Smith
  • We need to accept that excessive (German) current account surpluses are part of the problem. We need an expansionary policy and rising wages in Germany and other surplus countries to foster imports, plus a slightly higher inflation target by the ECB, combined with structural reforms in countries like spain, portugal, italy,... We need more efficient, not less Government spending in GIPSI countries. This way, internal devaluation would be possible without lowering nominal wages and prices (which leads into a deflationary depression) and it would be possible to reduce euro area imbalances much faster. To gain more time, it might be helpful to collect private capital in (Current Account) surplus countries and invest it directly in real assets in CA deficit countries, which would reduce Euro system imbalances in the short run.
    Ulrich Stolzenfels
  • The crisis has resulted from the flawed politcial, economic, and philosophical doctrine of neoliberalism. We must find an alternative and the economics profession must be involved in this.
    Dr Clive Peedell
  • People are at their best when they struggle and a struggle for a common good is better still.
    Matthew Nielsen
  • Keynesianism works. It worked in US in the 1930s, in Germany in the 1930s and throughout the Golden Age of the West (till the 70s.) It's high time people gave Keynes a bit more respect.
  • The united states currently had a GDP/debt ratio around 90%. The higher a countries GDP/debt ratio is, the more likely it will default. Last Time I checked both the UK and Japan have sustained a GDP/debt ratio that is much higher, and have done so for a longer period of time. Have they defaulted? Have they ever defaulted? Are they in danger of defaulting? The answer is no, so then why are american policy makers so worried about our own deficit if it is in better shape than other countries?
    John Hoffman
  • After nearly two decades as a City of London bank economist, I am probably more agnostic on macroeconomic theory than many academics, let alone bloggers. But economists should encourage policy-makers to follow the medical maxim of "First, do no harm", and current government economic policy in many countries fails to meet that test.
    Warren Oliver
  • These arguments are grounded in logical common sense and have met the test of experience.
    G C Harcourt
  • Lets be sensible, and stop using politics to solve economic problems.
    Anthony Shreeve
  • This “Manifesto for Economic Sense” Is another welcome, if brief, statement regarding a few of the shortcomings of the global politico-socio-economic system(s). It lists a few of the causes of these shortcomings; is essentially devoid of any specific, but contains only general, actions to be taken to correct the painful and unnecessary problems; and properly begs for more specifics and thoughtful action. The important questions are (1) what, specifically, is to be done, and (2) what about all the other myriad problems confronting humanity? After all, simply increasing “demand,” without regard to the environment, global population, etc., in a vulgar and blind attempt to increase “growth,” won’t resolve humanity’s numerous problems but rather simply transform them to a different yet just as deadly mix. I, for one, wish to complement most all the Commenters for their worthy remarks, as well as using their real names. It does help to keep the conversation and project focused on the important matter. I wish to respectfully introduce Socioeconomic Democracy, which speaks directly to the concerns of this Manifesto, as will as at least many dozens of other societal problems produced by mal-productive contemporary politico-socio-economic systems. Socioeconomic Democracy is a theoretically consistent and practically implementable socioeconomic system wherein there exist both some form and amount of locally appropriate Universally Guaranteed Personal Income and some form and amount of locally appropriate Maximum Allowable Personal Wealth, with both the lower bound on personal material poverty and the upper bound on personal material wealth set and adjusted democratically by all participants of a democratic society. This is trivially accomplished with elementary Public Choice Theory; that is “single-peaked personal preference distributions”. The intimately intertwined and serious societal problems Socioeconomic Democracy will eliminate or significantly reduce include (but are by no means limited to) those familiar ones associated with: automation, computerization and robotization; budget deficits and national debts; bureaucracy; maltreatment of children; crime and punishment; development, sustainable or otherwise; ecology, environment, resources and pollution; education; the elderly; farcical "free-market" fantasies, the feminine majority; inflation; international conflict; intranational conflict; involuntary employment; involuntary unemployment; labor strife and strikes; sick medical and health care; military metamorphosis; natural disasters; pay justice; planned obsolescence; political participation; poverty; racism; sexism; untamed technologies; and the General Welfare. A few, of many, relevant links: Socioeconomic Democracy: An Advanced Socioeconomic System (Praeger Studies on the 21st Century, 2002) “A Democratic Socioeconomic Platform, in Search of a Democratic Political Party” “Socioeconomic Democracy: A Nonkilling, Life-Affirming and Enhancing Psycho-Politico-Socio-Economic System” PelicanWeb’s Journal of Sustainable Development "Introducing a Socioeconomic Democracy" Prepared for Pakistan Futuristics Institute Silver Jubilee Publication: 4 Islamabad, Pakistan, 8 May 2011. This article includes an analysis of the many similarities and a few minor differences between Socioeconomic Democracy and Zakat, one of the Five Pillars of Islam. "Socioeconomic Democracy and Sustainable Development" "Socioeconomic Democracy" International Journal of Science, vol. 1, February 2012 (pp.33-48). "Socioeconomic Democracy: a Progressive Societal Arrangement" Studies of Changing Societies: Comparative and Interdisciplinary Focus, vol.1, June 2012. A list of the historical development of the ideas of Socioeconomic Democracy, as presented by this writer, starting in 1968, is available at We welcome and encourage feedback to this outreach, and look forward to working with all those interested in further peaceful development and implementation of these and other necessary changes aimed at the betterment of all humanity and the total planet. Robley E. George Director, Center for the Study of Democratic Societies Coordinador, Nonkilling Economics and Business Research Committee
  • I agree in all respects, but you let central banks off too easily. Perhaps they cannot fix our problems entirely by themselves, but they can do a lot more even without cooperation from fiscal authorities.
    Joseph Gagnon
  • Thank you for eloquently explaining the economic basics that our leaders completely ignore
    James Wyatt
  • Congratulations on the Manifesto. As a spanish citizen I think I live in the eye of the hurricane of this crazy magical thinking about the benefits of austerity for our economies. Sadly, these ideas have taken root in our current policy-makers in Spain and Europe and this seems to be going to go on a long time. We need to fight back. Thank you.
  • Excellent summary, but would add green fiscal policy: investment in energy saving and renewables is labour intensive, offers double dividend of reduced unemployment and emissions, much more effective than QE.
    Felix FitzRoy
  • "A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult." Mr. Keynes always knew this day would come: "When the rate of interest has fallen to a very low figure and has remained there sufficiently long to show that there is no further capital construction worth doing even at that low rate, then I should agree that the facts point to the necessity of drastic social changes directed towards increasing consumption. For it would be clear that we already had as great a stock of capital as we could usefully employ." -- 1934, "Is the Economic System Self-Adjusting?" And he had a prescription for it: "when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises... [i]t becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours." -- 1943 "The Long-Term Problem of Full Employment." He explained his rationale in a 1945 letter to T.S. Eliot: "The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally I regard the investment policy as first aid. In US it almost certainly will not do the trick. Less work is the ultimate solution. How you mix up the three ingredients of a cure is a matter of taste and experience, i.e. of morals and knowledge." Ironically, both Professor Krugman and Professor Layard implicitly rejected Keyness intellectual theorem with their unwitting embrace of the bogus "lump-of-labor (or output) fallacy" claim, which descended from a archaic prototype of Jean-Baptiste Says "Law of Markets" (aggregate supply creates its own aggregate demand) that Keynes directly opposed.
    Tom Walker
  • Excellent. Three additional points: (a) monetary policy is ineffective not only because interest rates are low, but because the banks who helped create the mess have taken fright and so, despite being flooded with cash by governments, they are not lending; (b) in a debt driven recession and with fiscal policy so tight their is a genuine shortage of good lending private sector lending opportunities because the parts of the private sector that need to borrow have no income stream to borrow against; (c) the combination of (a)and (b) means that a more expansionary fiscal policy would also increase the effectiveness of existing monetary policy.
    Andrew Graham
  • The solution to the Latin American debt crises taught us taught us that international cooperation and leadership are needed to find the way out of an obscure tunnel. Brady program brought back the region from the lost decade.
    Victor Peirone
  • As to depressions, make a habit of two things — to help, or at least, to do no harm.
    Sirus Dehdari, PhD Student
  • Please add your economic (sense) proposals to
    Chris Faugere